Question

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $370,500 of manufacturing overhead for an estimated allocation base of 950 direct labor-hours.

The following transactions took place during the year:

Raw materials purchased on account, $270,000.

Raw materials used in production (all direct materials), $255,000.

Utility bills incurred on account, $73,000 (90% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:
Direct labor (1,030 hours) $ 300,000
Indirect labor $ 104,000
Selling and administrative salaries $ 180,000
Maintenance costs incurred on account in the factory, $68,000
Advertising costs incurred on account, $150,000.
Depreciation was recorded for the year, $86,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).
Rental cost incurred on account, $111,000 (80% related to factory facilities, and the remainder related to selling and administrative facilities).
Manufacturing overhead cost was applied to jobs, $ ? .
Cost of goods manufactured for the year, $910,000.
Sales for the year (all on account) totaled $1,900,000.
These goods cost $940,000 according to their job cost sheets.

The balances in the inventory accounts at the beginning of the year were:

Raw Materials $ 44,000
Work in Process $ 35,000
Finished Goods $ 74,000

Required: 1. Prepare journal entries to record the preceding transactions.
2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)
3. Prepare a schedule of cost of goods manufactured.
4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.
4B. Prepare a schedule of cost of goods sold. 5. Prepare an income statement for the year.

Answer 1

1. In the books of Froya Fabrikker A/S :

Transaction / Event	Account Titles	Debit	Credit
		$	$
1.	Raw Materials Inventory	270,000
	Accounts Payable		270,000
2.	Work in Process Inventory	255,000
	Raw Materials Inventory		255,000
3.	Manufacturing Overhead	65,700
	Utilities Expense	7,300
	Accounts Payable		73,000
4.	Work in Process Inventory	300,000
	Manufacturing Overhead	104,000
	Salaries Expense	180,000
	Salaries and Wages Payable		584,000
5.	Manufacturing Overhead	68,000
	Accounts Payable		68,000
6.	Advertising Expense	150,000
	Accounts Payable		150,000
7.	Manufacturing Overhead	64,500
	Depreciation Expense	21,500
	Accumulated Depreciation : Equipment		86,000
8.	Manufacturing Overhead	88,800
	Rent Expense	22,200
	Accounts Payable		111,000
9.	Work in Process Inventory ( $ 370,500 / 950 * 1,030)	401,700
	Manufacturing Overhead		401,700
10.	Finished Goods Inventory	910,000
	Work in Process Inventory		910,000
11.	Accounts Receivable	1,900,000
	Sales		1,900,000
11.	Cost of Goods Sold	940,000
	Finished Goods Inventory		940,000

2. Raw Materials :

Beginning balance	44,000	2.	255,000
1.	270,000
Ending balance	59,000

Work in Process:

Beginning balance	35,000	10	910,000
2.	255,000
4	300,000
9	401,700
Ending balance	81,700

Finished Goods:

Beginning balance	74,000	11.	940,000
10	910,000
Ending balance	44,000

Cost of Goods Sold:

11.	940,000	Adj.	10,700
Bal	929,300

Manufacturing Overhead:

3	65,700	9.	401,700
4	104,000
5.	68,000
7	64,500
8	88,800
Over-applied	10,700

3.

Froya Fabrikker A / S Schedule of Cost of Goods Manufactured For the year ended...
	$	$
Beginning Work in Process		35,000
Add: Manufacturing Costs
Cost of raw materials used
Beginning raw materials	44,000
Add: Purchases	270,000
Less: Ending raw materials	(59,000)	255,000
Direct Labor		300,000
Manufacturing Overhead Applied		401,700
Total Cost of Work in Process		991,700
Less: Ending Work in Process		(81,700)
Cost of Goods Manufactured		910,000

4A.

	Debit	Credit
Manufacturing Overhead	10,700
Cost of Goods Sold		10,700

4B.

Froya Fabrikker S/A Schedule of Cost of Goods Sold For the year ended....
Beginning finished goods	74,000
Add: Cost of Goods Manufactured	910,000
Cost of Goods Available for Sale	984,000
Less: Ending Finished Goods	(44,000)
Cost of Goods Sold ( Unadjusted )	940,000
Less: Manufacturing Overhead Over-Applied	(10,700)
Cost of Goods Sold ( Adjusted )	$ 929,300

5.

Froya Fabrikker A/S Income Statement For the year ended....
	$	$
Sales		1,900,000
Cost of Goods Sold		929,300
Gross Profit		970,700
Selling and Administrative Expenses
Advertising Expense	150,000
Salaries Expense	180,000
Utilities Expense	7,300
Rent Expense	22,200
Depreciation Expense	21,500
Total Selling and Administrative Expense		381,000
Net Operating Income		589,700